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“We
have a more recent memory of high inflation, which could affect
how quickly costs are passed on and compensation is sought,"
Lagarde said.
Even though the ECB brought the 2022 inflation spike under
control with higher interest rates, “that experience has left a
mark,” she said. “An entire generation has now lived through its
first episode of high inflation — and it may not be as slow to
react a second time.”
Inflation in the countries that use the euro currency peaked at
10.6% in October 2022 after the invasion led to the cutoff of
most Russian natural gas supplies and sent oil prices
temporarily higher. Inflation in February was 1.9%, according to
EU statistics agency Eurostat.
Lagarde pointed out that monetary policy cannot lower oil
prices, and that central banks typically look past transitory
energy spikes without raising interest rates. Raising rates only
makes sense if higher energy prices start being built into
prices for other goods and into workers' wages, producing a
price spiral.
“If the energy shock is seen to be limited in size and
short-lived, the classical prescription of looking through
should apply,” she said, because by the time rate hikes take
effect with a lag of months, the inflationary spike is already
gone.
Central banks typically raise rates to fight inflation. That
cools price increases by raising borrowing costs for things like
house mortgages or building new production facilities.
She said there were reasons to think the current jump in oil
prices might be less inflationary than feared, because the
energy price spike is, so far, smaller than the one Europe
experienced in 2021-2022.
But if inflation appears to be heading persistently above the
ECB's 2% target, “the response must be appropriately forceful or
persistent.”
Lagarde said it was “too early to say where in this spectrum we
will need to be. ... We will monitor developments closely and
set monetary policy as appropriate.”
The ECB left its key interest rate unchanged at 2% at its last
policy meeting March 19.
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